Advisors see growth in their books: Includes chart

In the 2007 Brokerage Report Card, the average advisor reported managing slightly less than $350,000 per client. In previous years, IE’s Report Card asked advisors how many clients they had on their books. In this year’s survey, IE changed the approach and asked about households, in the belief that advisors could provide a more accurate number. As a result, some data are not directly comparable year-over-year.

But while IE can’t directly observe productivity changes year-over-year, it is clear that advisors, on average, have been able to grow their AUM. Advisors surveyed this year report that the average AUM increased to $86 million in 2008 from $80 million in 2007. This modestly bigger book of business is spread over slightly more than 200 households on average.

Although this represents less than an 8% increase in book size, it comes at a time when the investment environment is highly volatile and uncertain, as financial markets grapple with the global credit market disruption that began in August 2007 — well before January, when research for the survey began.

This same rising trend in AUM is evident for both the top-producing advisors and the industry’s smaller producers. In previous Report Cards, IE divided the advisor population into the top 20% and the other 80%, based on advisor productivity as measured by AUM per client. This year, the metric is AUM per household, but the principle of dividing the most productive advisors from the general population still holds.

The top 20% of advisors in this year’s survey report that their average AUM has grown to slightly less than $176 million from $166 million last year, a gain of just 6.2%. The other 80% of advisors also enjoyed modestly stronger asset bases: their average AUM rose to almost $64 million in 2008 from slightly less than $59 million in 2007, a gain of 8.7%.

However, the top 20% boast much smaller client rosters than the rest of the industry. The top producers serve only about 130 households on average, giving them an average AUM per household of more than $1.5 million. The other 80% of advisors serve an average of about 230 households, giving them an average AUM per household of around $325,000.

Given market conditions, it’s somewhat surprising that advi-sors have managed to increase their AUM. Markets certainly haven’t been doing the work for them. One possible explanation is that they are becoming notably more successful at getting their most prized clients to consolidate their finances.

This hypothesis is supported by the fact that the distribution of advisor accounts continues to skew toward the upside. Smaller accounts now represent a shrinking portion of the average advi-sor’s book. Accounts of less than $250,000 comprise about 27% of the average book, only slightly ahead of the $500,000 to $1 million segment, which now represents 26% of the average book.

The portion of the average advisor’s book that’s devoted to the smallest accounts is down from more than 29% last year, and accounts in the $250,000-$500,000 range are also down to a market share of 22% in 2008 from almost 26% in 2007.

The share of accounts in market segments above the $500,000 mark all rose year-over-year — and the biggest gains came in the richest segments: the share of accounts in the $500,000 to $1 million range rose to almost 26% in 2008 from 24% in 2007, while the increases were even greater for accounts that were more than $1 million. The share of the average advisor’s book devoted to accounts in the $1- to $2-million range rose to almost 14% this year, from 12.5% in 2007. More dramatically, the proportion of accounts worth more than $2 million jumped to 11% from just 7.5% last year.

@page_break@For the top 20% of advisors, accounts worth at least $2 million now represent 25.5% of their books. This is now the second-largest segment for the top advisors, trailing only the $500,000 to $1 million range, which accounts for 27% of the average book among the top producers. Last year, the $2 million-plus segment ranked fourth for the top advisors.

This year, the only account segments to see market share growth among the top producers are those worth more than $1 million. Accounts worth less than $1 million are becoming less significant to these advisors; the share that falls in the $250,000-$500,000 range dropped to 13.4% this year from almost 19% last year, and those worth less than $250,000 slipped to slightly more than 10% in 2008 from a 12% share in 2007.

But it’s not just the top producers that are relying more heavily on their largest accounts. For the other 80% of advisors, accounts worth more than $2 million are still the smallest segment in their books, but this segment saw the biggest growth year-over-year — jumping to a 7.5 share this year from less than 5% last year.

Their books, too, are skewing toward wealthier clients in general, as accounts worth less than $250,000 saw their share fall to about 31% of the average book this year from 34% last year. The $500,000 to $1-million account range now represents the second-largest portion of the average book (26%) among advisors that fall into the bottom 80% of producers, up from 23% in 2007.

Along with this overall shift toward larger accounts, advisors are also continuing to shift their books toward fee-driven sources of revenue. In 2007, transactions were the single most important revenue source for advisors, representing more than 54% of revenue, vs just 41% for fee-based sources. This year, these two revenue sources are virtually tied, with the share of advisor revenue coming from transactions down to about 45%, and fee-based sources up to 46.6%, including the 2.6% of revenue derived from fee-for-service arrangements.

For the top 20% of advisors, fee-based revenue, including fee-for-service arrangements, is unquestionably the biggest source of income, as it now accounts for more than half of their revenue (54%). Transaction-based revenue has slipped to just 38.5% this year from 45.5% last year. And the top producers are reporting that deal-based revenue has jumped to 7% from 2.8% last year.

Again, this trend holds true among the rest of the industry, although transactions still hold their edge — representing 47% of those advisors’ revenue, down from 56% in 2007. They’ve also seen gains in all other sources of revenue.

The one area in which the top advisors don’t appear to have a big lead on the other 80% is annual insurance revenue. Although the top 20% hold a slight edge, it is far slimmer than the advantage they have overall in terms of AUM and productivity metrics. The average top producer reported about $75,000 of insurance revenue, vs about $72,000 for the rest of the industry.

Insurance revenue might be comparable between the two groups, but the allocation between insurance products is vastly different for the top 20% compared with the rest of advisors. Almost 60% of the average top producer’s insurance business is in permanent life, compared with 36% for the rest of the industry. Permanent life is the biggest component of both groups’ insurance practices, but it has a much bigger share of the books of large producers.

Similarly, term life ranks second in insurance market share for both advisor segments, but it represents just 23% of the top producers’ insurance book compared with 31% for the rest of advisors. The other 80% of advisors also have a much bigger allocation to segregated funds — more than 24% of their insurance business, vs just 12.6% for the top producers.

Asset allocations within the investment portion of the average advisor’s book also differs between large producers and the rest of the industry. These numbers aren’t directly comparable to last year’s data, as the insurance products have been broken out as a separate category this year. (See page C7 for more on insurance.) Nonetheless, what is clear is that the top producers continue to place a heavier reliance on specific securities, whereas the rest of the industry has much bigger allocations to mutual funds.

Top producers report that 46% of AUM on their books is in equities and almost 22% in bonds, with just 13% in mutual funds. The rest of the industry has about 38% of AUM in equities and 18% in bonds, but almost 26% of AUM on their books is in mutual funds.

Allocations to most other products are fairly comparable between the two sides of the advisor population. Both advisor types have slightly less than 5% of their assets in income trusts, for example.

But there are a couple of subtle differences among the more marginal products. For example, top producers hold an edge in third-party managed products, with 5.6% of AUM on their book in these programs, vs 4.9% for the rest of the industry. The top advisors are less likely to use in-house managed programs, with this accounting for just 3.4% of AUM, vs 4.6% for the rest of the industry.

In addition, top producers are slightly more likely to employ more exotic alternative products, such as hedge funds, with these making up 2.5% of AUM on their books, on average, compared with just 1.7% for the rest of the industry. Conversely, the top producers lag in their use of cost-effective exchange-traded funds — only 2.3% of AUM, vs 3% for the rest of the industry.

Another area in which there’s little difference between top producers and the rest of the industry is in the use of financial plans. Both segments report that about half of their clients have financial plans.

Similarly, there isn’t a lot to choose between the top producers and the other 80% when it comes to banking products. IE delved into the product breakdown in this area for the first time in this year’s survey, as these products have become an emerging component of many advisors’ books. (See page C8.)

For both advisor groups, guaranteed investment certificates constitute about half of their banking revenue, followed by principle-protected notes at about a quarter of revenue. High-interest accounts and term deposits make up the balance.

Banking products may be marginal revenue sources for most advisors, but they are strategically important as they give advisors one more tool to encourage clients to consolidate their finances — and that trend appears to be growing ever more dominant. IE